I am a retired tough love angel who is tough when the situation calls for it but otherwise expects smart people to find their way with soft love.

Monthly Archives: October 2012

“To understand your customers, get out of the building says Steve Blank. Mika Marjalaakso says that to find a big problem and understand customers, get out of Finland.“

A week ago or so I had a really good discussion thread on my personal Facebook page about why Helsinki and Finland as a whole suck as a location for most startups, and what should be done to increase our chances for success. Don’t get me wrong. I LOVE startups but I “HATE” the hype. I do get it that to drive things forward and inspire people hype is a vital element.

I personally think – may be I am old or something – that it is better to say MY AIM IS to become the King of Norway instead of saying I AM the King of Norway. So, whenever anyone says (i.e. claims) that Finland or Helsinki is something that it clearly is not – that doesn’t inspire me because it is not a fact but a reality distortion of grand scale.

This is my list of three reasons why I believe Helsinki will never become the #1 startup hub in the world.

There are A,B, and C startups. A will be successful without any accelerators. They are the best of the best. B are good guys that some coaching in some cases might help a bit. C will fail anyway no matter what you do.

1. A good place to set up a business is a place where you have lot of customers who can buy your products, and you can be close to them to make sure that you are solving THEIR problems.

2. A good place for a startup is place where you are close to an epicenter of an existing or emerging ecosystem and its dominant players … and the cutting-edge, close to guys who will buy your company unless it becomes a really big.

3. A good place for a startup is a place with enthusiastic consumers and companies that are more looking at the positive side what a new product can bring to their lives and businesses and less worried about what can go wrong.

Abundance of capital is not that harmful either.

The above three reasons are not that important if your product can fully be distributed digitally, i.e. games. Many big problems, however, are far away and it is difficult to fully grasp them from Finland – you got to be there, not here.

So, I do believe that Finland can become one of the leading locations for startups in Europe for the B class, but it is extremely difficult to find reasoning why the A class would come here. We are still only five million people, far from big markets and the whole EU is a declining continent. Finland always do well in all kinds of nonsense competitions – and politicians just love that – but still nobody does direct investments here – if it would make sense, they probably would.

Is there anything we could and should do?

To summarize the three big ideas from my Facebook post comments:

Finland can’t copy the Israeli model which is working due to very unique history and close ties.

There are hundreds of wannabe Silicon Valleys, but there is only one Silicon Valley.

So, instead of west we should look into east. Politicians should take immediate and drastic measures to build strong ties with China and Russia, and make it ridiculously easy for the best minds in Russia and China to relocate to Finland, enjoy our excellent infrastructure and thousands of lakes. For Finland’s future, this is more important than investing in those unemployed people that don’t like to work.

Finns are traditionally at their best when put against the wall. The world is at war. Nations are fighting over scarce natural resources and control over various ecosystems that control value creation, and most importantly value capture for a nation. Our Welfare State in its current form is unsustainable. I have coined up a new term – the Entrepreneurial State – which means a dream state where majority of citizens understands how value at the national level is created, and the underlying legal and moral framework that offers strong incentives for each citizen to create value. This doesn’t mean there wouldn’t be social security at all but too much social security seems to kill motivation for a way too many.

To summarize the primary ways how value at the national level is created:

You sell your unique resources (e.g. oil, salmon) to other nations.

You steal from other nations or borrow money but never pay back.

You have competitive companies that export products to other nations.

Clearly Finns can’t create value through the first two options. So, our only and last hope is to build companies that are globally competitive. That’s our only option. We have a great infrastucture, skilled and educated workforce, beautiful nature etc. – these, however, itself don’t create any f***ing value. But, they can be leveraged to build great companies, to lure tens of thousands of Chinese and Russian people to move over here, and perhaps with the value arising from these companies we can better support our aging people.

Let’s open our borders for skilled Chinese, Russian, Brasilian immigrants to help us understand what are the big problems out there and build great companies here to address these problems, and win rather in direct investments and lose on these plethora of non-meaningful statistic competitions.

I believe Finland could prevail but there are too few smart politicians who could quickly drive through the required unpopular changes, many of which go against the social democratic agenda. Why not to start right away from simple, concrete things. Things like making it easier for skilled foreigners to come over, get a working visa and set up a business. Things like making it easy for our expats to move back and get a citizenship for their spouses. Little things, every day, right now.

I usually tell people that most everything I learned about being an entrepreneur I learned by screwing up at my first company. Oh boy how I sucked as the first-time CEO. That’s how it usually goes. Therefore it is a great idea to do your mistakes as early as possible, learn, and then move on to build a great company.

I think the sign of a good entrepreneur is the ability to spot your mistakes, correct quickly and not repeat the mistakes.

In my role as sweat equity angel investor (yeah, more knowledge and work, less cash) and startup advisor, I have lately engaged with a large number of Nokia-based startups. I identified the top ten most common mistakes in Nokia-based startups, and decided to openly share and discuss them in a series of blog posts titled as Top Ten Mistakes in Startups Rising from Nokia’s Ashes. This is the summary post. The original introduction is here.

I wanted to share my observations as I believe that increased awareness helps to avoid certain mistakes. I, however, painfully recognize that good judgement comes from experience, but experience comes from bad judgement. So most entrepreneurs just need to do their own mistakes and learning from others’ mistakes thus has limited value.

While I have written the posts with Nokia angle, the mistakes and lessons are relevant for any startup as there is a strong connection to not applying lean startup principles.

So, below is a short summary of the posts.

1. CEO Who Can’t Sell or Lead The Product

Startup CEO’s job is to transform a collection of raw ideas into a product that can be sold to paying customers. If he is not hands-on with the product and how it is sold – and I mean really, really hands-on – how could he drive the operations then? He can’t. Instead he becomes a helpless figurehead who runs around doing non-essential chores such as talking to press, networking with investors, or spending quality time with a beloved excel. While useful and important, these are not the core of a startup CEO’s job prior there is at the minimum a product prototype available. I have seen a number of these general management focused CEOs in Nokia-based startups. There, however, is nothing general to be managed in a startup until it has a sellable product. At the early stage, a CEO who can’t sell or lead the product becomes the worst-case free rider and cost center whose time has not yet come.

2. The Free Rider Issue

Each co-founder with a working shareholder status is expected to contribute full time every single day while occasionally working one’s ass off day and night to get the startup off the ground. A co-founder whose skills and contribution are not relevant for a startup on a daily basis is essentially a free rider, or an advisor disguised as a working shareholder who should accordingly have only an advisor stake. Although the free rider issue is common in any startup, it is likely even more common in Nokia-based startups. Why? Nokia’s offsprings are oftentimes co-founded by a team that has been working together at Nokia. While the team’s composition and their combined skill set might have been a good fit in a product line with 100+ people, the fit is quite likely suboptimal for a startup employing five to ten people. The Nokia Bridge Program further negatively influences both the ownership structure and team composition. A free rider situation when it arises must be solved swiftly because if left unresolved it easily develops into a cancer that kills your startup.

3. The Ownership Problem

If the founders’ pie is distributed evenly, it means in practice that no one is in charge. An equity stake for a co-founder is essentially a prepayment for expected future contributions. If we take an average Nokia-based startup with five co-founders, it is a good educated guess that each co-founder holds a flat 20% stake. So, their expected future contributions must then be equal as well? Not really! They just haven’t had either understanding or balls to talk how to divide the founders’ pie. I strongly recommend co-founders, prior to founding a company, sit down and engage in these profound what-do-I-bring-on-the-table series of discussions. Potential free riders are spotted and a capital table that is collectively perceived as fair is nailed down. Things change over time, and especially so in a dynamic startup – and there is nothing wrong with that! A shareholders’ agreement, especially stock vesting, helps co-founders deal with this change in a predetermined way.

4. Culture Gone Wrong

Building a great startup starts with building a great culture. It glues unique, talented co-founders with diverse backgrounds and values into a high performance team with shared vision, common goals and winning attitude. What makes a great startup culture? It begins with the fact that you are valued based on your ongoing actual performance. This is in stark contrast how things work in any large corporation. In a startup, there are no silos and everyone does everything. A startup co-founder can have a family but when the servers are down, it is the wife’s (or husband’s) job to wait until a critical bug is fixed and the servers are up again. Low salaries, commitment, passion, sense of urgency are all key elements in a great startup culture. It is a big challenge for any team coming from Nokia without relevant startup experience to succeed in building the right kind of culture for their first-ever startup.

5. High Burn Rate

High burn rate in a startup means increased requirements for external funding and shortened runway to reach either profitability or critical milestones for the next funding round. I have seen catastrophic burn rates in many Nokia-based startups. I believe this problem starts with people who are used to pay a lot even for mediocre services as they have had the money in the budget, and who don’t have a clue on how to be frugal and run a lean startup. In a pre-revenue startup, salaries should be low, preferably in the range between 2000-4000€/month, with no relation whatsoever to previous salaries paid at Nokia. Other contributing factors are poor startup culture, easy money from Nokia combined with easy public funding leverage from Tekes, and the share ignorance how detrimental high salaries and premature scaling can be for a startup and its culture. High burn rate will kill Nokia-based startups in numbers.

6. Not Being Close to The Customer

It is hard, if not impossible, to develop a world-class product in a lab far from where the lead customers and key ecosystem players are. The place to be is rarely Finland, often USA, China or an emerging market in Asia or Africa. This is an arena where Nokia-based startups could excel if the founding team has members physically located in target markets to bring instant reach and local customer development. In some Nokia cases, I have been delighted to see this local customer development element in play from day one. In way too many cases, the customer development part is handled from Finland via Skype and email, by using local agents, and once and awhile hopping on a plane to have face-to-face meetings with far away customers and partners.

7. Minimum Viable Product

For engineers with Nokia background, it seems rather natural to build gigantic MVPs. Nokia is not known for its agile, iterative software development capabilities, but rather on the fact that whatever they were building, it always required a hundred engineers to begin with. It takes a lot of product vision to define a meaningful MVP, and not having lean customer development operations at the vicinity of lead customers and partners makes it even more difficult. I believe that avoiding excess funding, having a small nimble software core team comprising three to five people on average, and establishing a feedback loop with a few lead customers early on are keys to keep the MVP scope reasonable and focus tight.

8. Product-Market Misfit

I have been thunderstruck that some teams with Nokia background are not laser-focused on end users and their needs. They rather have a product and channel-centric mindset where building an average product based on internal product specification and perhaps on light feedback from prospective channel partners is the way to go. With a long product development cycle this is truly amazing, as it means a team is willing to bet their future on unvalidated product specification. They don’t know if there is any real end user driven demand, and therefore a sustainable market, for the product or not. It would make a lot of sense to pay more attention to end users as they will ultimately decide which products will fly or die.

9. The Arrogant A**hole

Most startups are broke. To get things done, entrepreneurs need to leverage their own network and the networks of their co-founders, investors and advisors. Sometimes you need to get service from previously unknown service providers at below market price or paying with equity only. People don’t move their asses and do favors just because you say so and some time ago used to have a Nokia’s badge, and certain authority that came with it. To help you out, people want to get something in return – like feel good in helping you out, or get a pole position to offer their services later on when you can pay with real money. A startup co-founder, and this applies especially to the CEO, has to know how to ask help, and how to get people do things for him while most of the time the only instant payback is his gratitude. But make no mistake, earning someone’s gratitude and trust, and thus being able to someday ask help yourself, that’s incredibly powerful..

10. Go-To-Market Strategy

Selling an unknown product built by an unknown startup is not easy. Some Nokia-based startups do have marvelous go-to-market plans that could work, but only if the startup had both the credibility and resources of a larger, more established company. As they don’t have either, the plans will most likely fail miserably. Every startup desperately needs an entry point to its market, an entry point to close the first customer, then second, and so on. Problems with go-to-market strategies stem from not understanding customers and their needs well enough, and perhaps with Nokia history it is a little bit easier to have an attitude problem and think that distribution and scaling up are not issues – as they never were while working at Nokia. Yeah, right.

Always make new mistakes!

I have received a lot of interest from startups to work with them on the above described issues. After thinking a while, I concluded that perhaps a workshop is the best way to address this need. The workshop is now available and is called the Tough Love Workshop, and If interested you can read more and order it here.

And here is a condensed set of slides on the topic. You can, for instance, use slides for facilitating important yet tough discussions in your startup.

P.S. I also want to voice out, before anyone brings it forward, that some of the best startups I have seen lately are Nokia-based, and thus not all Nokia-based startups share these mistakes while most do.

Selling an unknown product built by an unknown startup is not easy. Some Nokia-based startups do have marvelous go-to-market plans that could work but only if the startup had both the credibility and resources of a larger, more established company.

As they don’t have either, the plans will most likely fail miserably. Every startup desperately needs an entry point to its market, an entry point to close the first customer, then second, and so on. Problems with go-to-market strategies stem from not understanding customers and their needs well enough, and perhaps with Nokia background it is just a little bit easier to have an attitude problem and think that distribution and scaling up are not a big issues – as they never were while working at Nokia. Yeah, right.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

Editor’s note: This is a guest post by Jukka Kallio, the CEO of KallioLaw (www.kalliolaw.fi) and ranked in 2011 top 100 M&A lawyers in the world, an angel investor and startup advisor.

If you are looking the latest post in the Nokia Startups Mistakes series, you can find it from here.

Below are few key points that I would like to address when you are drafting a Shareholders’ Agreement (“SHA”). These things may not apply to all companies, but for sure to the start-ups:

1) In general, big mistakes can be avoided if you do not build wrong incentives in the SHA, such as granting one stockholder a right to block something important or allowing a group of stockholders to use such provisions only for their own benefit. I have seen many times that provisions that were initially intended for some specific scenario, are used in other context for the benefit of one or several stockholders.

2) Working obligation: for start-ups the human resources are vital and that is why the working obligation of the founders and possible other key employees are agreed in the SHA. Think about how long you want to require others to work for the company and how long you are willing to be committed yourself. And of course, the working obligation should be in line with the company’s business objectives. Many times I have seen provisions that do not really specify the working obligations, e.g. whether it should be full time based, require meeting certain milestones or raising funds, etc. The more detailed you discuss on these things the less problems you typically face in the future.

Also – as always when setting obligations –, it is important to agree what are the penalties if one does not comply with his/her working obligations. Think about what should happen if one is not complying with it? If nothing is agreed the breaching stockholder should compensate damages but it is not easy to prove such damages. In the worst case scenario, the breaching stockholder will have the right to keep his/her shares and no damages can be proven! The vesting of the shares will resolve these kinds of things easily and it is discussed in the next bullet.

3) Vesting: in the SHA of a start-up in which working commitments are required, i.e. in all start-ups in fact, the circumstances may change in the company or in the family of stockholder, etc. This means that we need to answer to a question “what happens to such stockholder’s shares in a start-up who agreed to work for the start-up but is not doing it? Typically it is agreed in the SHA’s of start-ups that there is a time period during which one will “earn” his/her shares. But, it is important to avoid wrong incentives – as discussed above – which would allow the leaving stockholder the right to keep all his/her shares. It would be very demotivating to the remaining stockholders and would be a typical “free rider” issue.

So, if you agree on working obligations, set also vesting for the shares that are aligned with the set time frames, milestones or reaching other targets. A good vesting provision will make sure that all working stockholders are treated reasonably and fairly but also prevents “free rider” issue.

4) Decision-making: many times in the SHA’s there are provisions on what qualified majority is required for fund raising (issuing new shares to investors or others). However, that will not mean that the start-up can in practice raise funds. Even if your start-up can issue shares to an investor, you may not be able to complete it because a shareholder will not agree to sign the new SHA required by an investor thus blocking the fund raising. You should always think what actions are needed to be able to execute things that are agreed in higher levels in the SHA’s. I have seen cases where a start-up has raised funds and investor requires new SHA but there are one or more minority stockholders who refuse doing so and, thus, block the start-up getting funded. Not an optimal situation! It should be discussed and agreed in the SHA when the start-up and stockholders may force other stockholders to execute and be bound with the same contracts than the others – however, being fair and avoiding wrong incentives in the SHA.

“Don’t be an *sshole.”

This is part of my Nokia Startups Mistakes series. For a backgrounder, please read the introduction. This is a somewhat difficult mistake for me to write about as I haven’t personally witnessed it in my interactions with Nokia-based startups. Some angels and VCs, however, have mentioned enough times that they think quite many ex Nokians suffer from being arrogant. This behavioral trait most likely is rooted in how things were done at Nokia Corporation.

Let me first define what is understood with arrogance here.

In authoritarian leadership style a Nokia executive while still at Nokia directed his subordinates and especially external vendors to make various things happen without providing any intrinsic or monetary motivation beyond punishment in case of non-compliance. This style may work in a large corporation where an executive holds undisputed authority over his subordinates, and vendors are at the mercy of the corporation and its dictators.

When a Nokia executive who has lost his beloved badge, and the authority and recognition that came with it, continues to command external people and service providers without offering any other motivation than his lost authority – that’s what we call as arrogance.

Why arrogance can be bad?

Most startups are broke. To get things done, entrepreneurs need to leverage their own network and the networks of their co-founders, investors and advisors. Sometimes you need to get service from previously unknown service providers at below market price or paying with equity only. People don’t move their asses and do favors just because you say so but instead they want to get something in return – like feel good in helping you out, or get a pole position to offer their services later on when you can pay with real money. A startup co-founder, and this applies especially to the CEO, has to know how to ask help, and how to get people do things for him while most of the time the only instant payback is his gratitude. But make no mistake, earning someone’s gratitude and trust, and thus being able to someday ask help yourself, that’s incredibly powerful.

What then motivates people help each other?

So far we have firmly established the following two things:

To get things done fast on a timely manner, and to operate at low costs in the early days, a startup needs to tap into the network of its co-founders and advisors, and once and awhile source important services while not being able to pay any significant money.

Being arrogant, i.e. trying to exercise authority on people you don’t have any authority, is not going to help you win people on your side.

So, how should you then deal with people?

What are the six weapons of influence?

Robert B. Cialdini is my hero. He is the author of one of the greatest business books ever written: Influence: The Psychology of Persuasion. This book is a must read for anyone who ever needs to deal with other people, yeah – it’s like a bible is for believers. The book is fun to read and reviews many of the most important theories on and experiments in social psychology.

I have just summarized here Cialdini’s thoughts for your convenience, but to truly grasp them you should read the book.

Reciprocation. We humans are unique amongst all animals as we incur debt from services and gifts from other people, and then we feel a growing urge to pay back. Likewise if we say no to someone that tried to sell us something, we become more prone to buy something from the same guy later on.

Commitment and consistency. Once people have made a choice or taken a stand, they are under both internal and external pressure to behave consistently with that commitment. When you get someone to commit verbally to an action, the chances go up sharply that they’ll actually honor that commitment.

Social proof. This is a very powerful shortcut that many smart and dumb people take in the times of information overload. Most investors are sheep that follow one other, and thus getting a lead investor that serves as a credible social proof will get you the rest.

Liking. People love to say ‘yes’ to requests from people they know and like. And people tend to like others who appear to have similar opinions, personality traits, background, or lifestyle. More people will say ‘yes’ to you if they like you, and the more similar to them you appear to be, the more likely they are to like you.

Authority. Most kids are raised with a respect for authority. Authority plays internally little role – yet it has a role – in startups which are meritocracies, and to get external people do things for you just because you say so – yeah, that’s arrogance and probably doesn’t work.

Scarcity. Opportunities seem more valuable when they are less available. This, again, is a very important principle e.g. when raising funding or recruiting new people.

To summarize:

Startups should be meritocracies and thus ruling by authority doesn’t work inside or outside the company. To get outside people do favors for you, besides paying money for their services, you need to offer them incentives grounded to social psychology. Asking for help, for instance, is a very powerful way to empower people. People, in general, like to help other people when nicely asked, as long as the effort required is decent, and you pay back with your gratitude.

And, read the Cialdini’s book – you will have lots of fun, and the probability that you will be able to raise funding from investors or buy services below market rate increases.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

The single point I want to highlight in this post is the fact that a channel partner is not your customer. Therefore you should not pay too much attention to their requirements. This is a common mistake for all entrepreneurs but perhaps even more common to Nokia-based startups as both Nokia and its network part are known for designing their products to mobile operator requirements. While this approach back in time was a competitive advantage for Nokia, the same approach won’t work for a startup.

Your channel is not your customer

I have been thunderstruck that some Nokia-based startups are not laser-focused on end users and their needs. They rather have a technology-driven and channel-centric mindset where building a product starts with internal product specification shaped lightly by feedback from prospective channel partners. Unlike a fragile startup, mobile operators with fear of Google and Apple, have all the time in the world to specify imaginary products that would in their dreams help them to stay relevant and compete against Google/Apple juggernauts. Most of these imaginary products can’t be pushed to end users unless they really want them.

Focusing on an imaginary product without true end user pull means typically a bitter death for a startup. Some products, e.g. many telecom products, have relatively long product development cycle, which further increases the overall risk. And this because you burn all the cash and when the real end users reject your product, then the channel rejects your product too, and at the end of the day there simply is no more money left for a pivot.

If you build a product to your channel, you don’t know if there is any real end user driven demand, and therefore a sustainable market for your product or not. You are practically betting your startup’s future on guesswork by a middle man. How stupid is that?

It makes a lot of sense to pay most attention to end users as they will ultimately decide which products fly or die. This is not to say that channels wouldn’t be important – yes, they are – but do design your product with real end users’ needs in mind.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussion by sharing your own angle and experiences on this topic, or commenting on something, anything on this post. The preferred place for discussion is the Facebook page at https://www.facebook.com/ToughLoveAngel.

For engineers with Nokia background, it seems customary to build gigantic minimum viable products (“MVP”). Nokia is not known for its agile software development practices. On the contrary, according to many Nokia alumni, it always took a hundred engineers to build anything at Nokia – no matter how small.

It takes a lot of product vision to define a meaningful MVP, and not being close to the customer makes it even more difficult.

How to keep the product minimum?

Avoid excess funding,

Slideware, paper prototypes, UI sketches are an excellent way to test market.

Start with a small nimble software team comprising one to five people. If you need a bigger team, it is unlikely that you are building the minimum.

Use agile and iterative software development practices.

Get out of the room and establish a feedback loop with a few lead customers early on.

It is much easier to work with the problem definition and play with various paper prototypes etc. longer when there is only you and perhaps your co-founder. The whole situation changes mentally when you have even a small software team in place, and guess what they start to do?

Yeah, right – they start to code while it in many cases would be much wiser to keep working with the problem definition and cheap paper prototypes.

I hope you will enjoy this series, the thoughts it provokes, and the discussion it triggers. Please do participate to the discussionby sharing your own angle and experiences on this topic.